How to Prevent Cash Flow Problems for Your Business

October 30, 2013 | Valerie Wong

It is no secret that a large number of small businesses will fail within their first five years of operations. Numerous studies have shown that cash flow problems remain the biggest reason why small businesses fail. If you run a small business or are planning on starting one soon, one thing you need to do right away is to develop strategies that will prevent cash flow issues. Here are some of the most important considerations:

Be Careful With Your Expenses

Any business will require some spending. But this spending should be done very carefully, especially if you run a small business that is just starting out. When you look at expenses, consider how essential that expense actually is. For example, if you need an office space for your business, you should think about getting the smallest one that will suit your current needs. Renting a 2,000 sq. ft. space when a 1,500 sq. ft. one would be enough is simply a waste. If you need to buy equipment, you may consider buying used or refurbished items as opposed to brand new ones.

Set Realistic Sales Targets and Meet Them

One of the simplest approaches to cash flow management would be to ensure that your projected sales targets are always met. However, you must be careful to set these targets at levels that you can hope to realistically achieve in a given time period.

The main source of revenue for your business will be the money flowing in from products or services that you sell. Work on your marketing, customer acquisition, sales closing and customer loyalty techniques. A company that consistently achieves its sales goals is a lot less likely to run into cash flow problems.

Stay On Top of Trends and New Developments

The cash flow of your business could suffer from problems as a result of external elements that you have little control over. For example, if your business is highly dependent on tourism, but the number of visitors to your city is down significantly, your business will probably experience problems.

As a business owner, you should always be on the lookout for elements that could change in the external climate, such as worsening market conditions, the development of new and more efficient technologies that causes some types of businesses to become obsolete, new government regulations in your industry, or an increase in taxes. While there might be little you can do to change these issues, if you are able to show some foresight, you may be able to adapt your business in a way that would limit the disruption to your normal cash flow.

Maintain a Sensible Credit Policy

Having the ability to meet your sales targets is one thing, but you will actually need to see the money from these sales. Having too many customers with outstanding debts can significantly weaken your cash flow position. If your customers don't pay you, then you may run into trouble paying your creditors.

All of this can be alleviated by having a better knowledge of who your biggest customers are and develop a credit policy that makes sense for both you and these customers. This should reduce the amount of unpaid debts and minimize the amount of customers who have outstanding debts after several months.

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